Decoding Brexit: What’s in it for India?

Reading time: 5-6 minutes.

Boris Johnson, the UK’s new Prime Minister will be dealing with a lot of issues left over by his predecessor, Theresa May. May was forced to resign after the UK’s lawmakers rejected to ratify the Brexit deal that she secured with the EU three times and also failed to agree on any alternative outcome.

At a glance, Johnson’s Brexit plan is simpler than May’s: Get a new agreement with the EU or crash out on October 31 with no deal. Given that the EU has said numerous times that May’s deal, formally known at the Withdrawal Agreement, is not open for negotiation, no deal seems on the cards.

When Parliament returns from its summer holiday on September 3, Johnson could well face a motion of no confidence in his government. It’s a vote that Johnson and his team can’t expect to win. He currently has a parliamentary majority of just one and some of his own Conservative lawmakers have implied they will put blocking no deal ahead of party loyalty.

But why is Britain willing to leave EU in the first place?

Brexit is the abbreviation of the term “Brtiish Exit” from the European Union. It mirrors the term Grexit, a term which was coined and used to refer to the possible exit of Greece from the EU. Britain decided to leave the EU after the result of the referendum which stated that 51.9% of the voters favoured exit of Britain.

A referendum denotes voting in which everyone of voting age can take part, normally giving a ‘yes’ or ‘no; answer to a question. After growing calls from many MPs of the Conservative Party and the UK Independence Party (UKIP), the referendum was finally held on June 23, 2016. A similar referendum was held in 1975 in which 67% of the voters voted to stay in the EU.

While there is no specific reason why Britain took this decision, people who voted for leaving the EU argued that it was necessary to protect the country’s identity, its culture, independence and its place in the world. They essentially were opposed to immigration of people into Britain for work related purpose. The Eurozone crisis added to their resentment.

Which international law is involved in Brexit?

Article 50 is a clause in the European Union’s Lisbon Treaty that outlines the steps to be taken by a country seeking to leave the Union voluntarily. Invoking Article 50 kick-starts the formal exit process and serves as a way for countries to officially declare their intention to leave the EU.

The procedure applies to each of the 28 nations of the EU; “in accordance with its own constitutional requirements’. The first step along the road to departure is for the departing Member State to notify the European Council of its intention to do so. The UK did this on 29th March 2017, after the assent of 498 MPs in the House of Commons. The next step was for the EU to negotiate and conclude a Withdrawal Agreement with the departing state, setting out the arrangements for its withdrawal.

What can be Brexit’s repercussions on Indian economy?

Brexit was one of the biggest global macroeconomic events in June 2016. The decision of Britain shook markets worldwide and had a major economic impact. This was clearly reflected in rebound the Indian stock markets showed post referendum results.

The UK has been an attractive centre of business and international finance due to its strong legal system and contract enforcement practice. India is one of the top investors with UK on account of UK being part of the European Union. With its strong investment climate and relationship with EU, it was considered the gateway to do business in Europe.

Many Indian companies like Rolta, Tata Steel, Bharti Airtel Ltd (UK) have set up operations in the UK and derive revenue from European operations. A no-deal Brexit is likely to cause some disruption in the operations and may also cost a few jobs. Jaguar Land Rover plc, owned by Tata Motors ltd. plans to eliminate 4,500 jobs in response to sales slowdown caused by Brexit and slowing Chinese demand.

Indian companies would need to recalibrate European operations, like setting up an additional operating company within European Union. This means short term disruptions will have a financial impact, as also take up management time. Similarly, Indian companies who have used London as their base to raise capital abroad may face issues and may need to work harder on the process.

Given that this risk has been around for a while, Indian investments in 2017 were at the highest level since 2008. This is partly driven by the depreciation of GBP (British pound sterling) against the rupee post the Brexit vote. Indian companies will need to focus on their merger and acquisition deal efforts across Europe while tackling the British market.

India would also need to negotiate a free trade deal with the UK as it proposes to retain the same goods and services schedules post Brexit. The concessions agreed upon by WTO members’ prior to Brexit may not hold the same value once Brexit happens.

All the additional costs and tariffs agreed upon may need to be rescheduled. India exports around USD 9.6 billion worth of goods and services to the UK. Though there may be other factors looming, Brexit may be another reason why the trade surplus of USD 4.6 billion in 2017 almost dropped by half to USD 2.5 billion in 2018.

The road ahead…

India sees the British exit as an opportunity to expand its trade and economic relations with the UK. British and Indian officials have been signalling that Brexit will make the conclusion of a bilateral free trade pact much easier. This is because Brexit provides a fresh opportunity to India to strengthen its economic relationship with the UK through an India-UK trade and investment agreement.

On the other side, a no deal Brexit and the uncertainty it produces would have many adverse impacts on the Indian economy in general and Indian businesses in the UK in particular. For instance, at present, roughly 800 Indian companies operate in the UK. The UK serves as an entry point for many Indian companies to the European market. A disorderly British exit would shut the direct access of these companies to the EU market. That may force some of the companies to relocate or shut down their businesses.

Finally, the doubt of a no deal scenario and risk aversion tendencies across markets can further depreciate the already fragile rupee. Economists note that the US Dollar would be the only currency that benefits from a hard Brexit and the subsequent uncertainty in global markets. Such an outcome will not only affect the pound sterling but the currencies of emerging markets as well, including the Indian rupee.

A no deal scenario will, therefore, have an adverse impact in the short term. However, in the longer run, Brexit is expected to provide an opportunity to India to reset its trade and economic relations with the UK and the EU.

-This article is brought to you in collaboration with Shivaang Maheshwari from Gujarat National Law University, Gandhinagar.

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